A propitious prescription to solve the present economic crisis

The crash of the housing bubble and the resultant worldwide collapse of securitized mortgage debt instruments have decimated major financial institutions and precipitated fear not seen since the Great Depression.

All economies of the world are afflicted with a malignant paralysis that has almost totally shut off credit and eviscerated consumer and business demand. Banks have stopped lending, consumers have stopped buying and businesses have stopped investing.

American workers are being laid off, so more people lack income to buy goods and services, so more businesses suffer still lower sales, and so they lay off personnel in a downward spiral.

It is imperative that we figure out how to stop this cataclysmic tailspin.

Inasmuch as lack of demand is the major cause of this corrosive cycle, what’s desperately needed is to create demand. Fear means it’s not going to come from consumers or private industry. The solution is for the federal government to become the consumer and employer of last resort. There is no other shortcut to avoid ruinous recession. The federal government must jumpstart our American economy.

The Treasury and Federal Reserve have committed or injected more than $2 trillion, in addition to the initial $150 billion stimulus that President Bush and Congress distributed to consumers, to little effect. Nevertheless, banks have stubbornly remained overly cautious; they won’t lend and consumers still do not spend.

The U.S. should launch a major infrastructure initiative, building or repairing bridges, tunnels, highways, sewer and water systems, piers, schools, hospitals, airports, transit systems and electric grids. This would employ enormous numbers of workers and generate enormous demand and output that would dramatically improve the quality of life for all citizens and for their children and grandchildren.

Such a worthy endeavor could be instituted quickly with remarkably salutary results. Why wait or hope for demand to come from other nations so exports drive economic growth? Why is it more important that demand and spending be for iPods, TVs or Las Vegas casinos? Why is it more important or valuable for someone to work at the counter of a department store, as a dealer at a casino, or even as a Wall Street salesman of mortgage-backed securities? Isn’t it better if we can benefit from our nation’s superior labor force by producing the things that enhance the quality of our lives?

Similarly, to achieve full employment, every unemployed person can do something constructive. Instead of getting an unemployment check for doing nothing, he or she could be paid for real work building the greatest and most enviable infrastructure in history. People thus employed would earn income and the satisfaction of doing something rewarding and beneficial.

There is no reason for anyone to be unemployed (other than those who are completely disabled) as long as there is a bridge that needs repair or a road that needs building. No one should be paid for being idle. This kind of full employment infrastructure project is much like the Works Progress Administration established by President Roosevelt in May 1935. The WPA eventually employed approximately one-third of the nation’s 10 million unemployed. A modern WPA would yield broad, long-term benefits; one in four bridges is obsolete or structurally deficient, and congested highways waste billions of dollars in gasoline each year. Whoever is employed in this estimable effort can still look for a better, higher-paying job, and could be given time off for interviews or other serious pursuit of a more rewarding career opportunity.

Some may take issue with this Keynesian approach as smacking of (failed) socialism. But it is surely no more socialistic than the government taking over AIG or Fannie Mae and Freddie Mac, or controlling major equity positions in some of the largest banks and financial institutions. And taking some constructive and beneficial ideas from socialism at certain times may not be all bad. After all, the goal is to achieve maximum productivity and the most gratifying quality of life while providing the highest degree of economic security and the least waste and despair.

Well-intentioned meetings of G20 leaders have not produced solutions to our present economic breakdown, only more bureaucratic regulations and the goal of developing longer-term proposals to avoid economic disintegration happening again. What we need is decisive leadership to solve existing problems now.

Fed Chairman Alan Greenspan could have averted or minimized the terrible costs of the technology bubble if he had raised margin requirements, which I urged him to do. He could also have acted to limit the housing bubble. What was needed then was leadership, and it is needed again now.

Before the domino effect of growing unemployment and contracting demand continues and exacerbates the slump even further — to the point where it actually turns into another Great Depression — it’s essential for the president and Congress to act decisively. They must launch a WPA-type program to meet and cure our economic crisis, so as to eliminate unemployment, maximize productivity, end the recession and bring better times.

As Rahm Emanuel, President-elect Obama’s new chief of staff, recently said, “You don’t ever want a crisis to go to waste; it’s an opportunity to do important things that you would otherwise avoid.”

Mr. President, Mr. President-elect and Congress, please don’t waste this crisis (or allow this crisis to produce such devastating waste and pain). Act! Implement this prescription to produce a renewed prosperity for all Americans.

Davis, a shareholder in The Hill’s parent company, is an economist, an MBA graduate (with distinction) from Harvard Business School and author of From Hard Knocks to Hot Stocks (William Morrow and Co.) and Making America Work Again (Crown).